Purchasing is garnering increasing attention from top management as it significantly impacts profitability and supply chain performance. It entails professional procurement by an organisation, encompassing all items for which an external invoice is received. These items may include goods (such as materials and office supplies), services (like temporary labour and accountancy services), and works (such as factory or office renovations).
The purchasing process comprises six essential steps: specification, supplier selection, contracting, ordering, expediting, and follow-up. Specification is the first step in the purchasing process, part of the initial three steps, commonly referred to as the tactical purchasing process. At this stage, precise requirements are determined, encompassing aspects like quality, halal compliance, logistics, maintenance, legal considerations, environmental standards, and budget constraints.
Who Formulates the Specifications?
The responsibility for specifying purchase order requirements lies with the user or budget holder. Purchasing, in turn, ensures that the specification is formulated in objective and supplier-neutral terms. However, input from other departments or individuals, including research and development, quality assurance, internal halal committees, laboratories, and sometimes even customers, may be sought during the specification drafting process. It is crucial for each specification to be endorsed by the purchasing department before being released to a supplier.
What Should Specifications Include?
Specifications encompass both functional and technical aspects. Functional specifications delineate the desired functionality of the product, service, or works for the end user. They encourage suppliers to utilise their expertise and innovative technology to meet buyer requirements. In the case of services, functional specifications may outline input, throughput, output, and outcomes, which can be further elaborated upon in a service level agreement during the contracting phase.
Technical requirements, on the other hand, provide detailed information about the physical or chemical properties of the product, as well as the activities to be performed by the supplier. These may be documented in technical drawings and activity schedules.
The longer the relationship or higher the level of trust with a supplier, the greater the emphasis on functional rather than technical requirements.
The specification stage exerts the most significant influence on total cost of ownership. Early involvement of the purchasing department during this phase is, therefore, critical. One reason for this is the opportunity to standardise, thereby reducing the number of different products, subassemblies, and parts. Successful companies typically have four to five times fewer components than less successful ones, made possible by purchasing's in-depth knowledge of the supplier market.
Lessons Learned
Common pitfalls include skipping the specification phase altogether, proceeding directly to supplier selection without a clear understanding of requirements, overlooking consumables, spare parts, or support services related to a purchase, and placing excessive emphasis on technical rather than functional requirements. It is vital to clearly designate responsibility for formulating and approving specifications.
While developing and refining specifications may incur time and expenses, purchasing unsuitable products and services proves even more costly in the long run!
Dr. Marco Tieman
CEO, LBB International
